Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

Tuesday, May 5, 2015

The NFL Is Giving Up Its (c)(6) Tax Status

So the NFL
is going to relinquish its 501(c)(6) status, meaning that it will start filing
as a regular, tax-paying corporation.

And I doubt
it means much, unless someone simply has simply lost the plot when it comes to
the NFL.

Let’s talk
about it.

The
gold-plate among tax-exempts is a 501(c)(3), which would include the March of
Dimes, Doctors Without Borders and organizations of that type. The (c)(3)
offers two key benefits:

(1)Donations made are deductible, which
is especially important to individuals.

(2)Donations received are not taxable.

Point (1) is
important because individuals are allowed only a limited plate of deductions,
unless the individual is conducting a business activity. Point (1) is probably less
important to a business, as the business could consider the donation to also be
advertising, marketing, promotion or some other category of allowable deduction.
An individual unfortunately does not have that liberty.

Point (2) represents
the promised land. We would all like our income to be nontaxable.

The NFL is a (c)(6), which means that it does
not receive benefit (1). It does not need benefit (1), however, as no one is
trying to claim a donation.

Here is how the tax Code describes a (c)(6):

Business leagues, chambers of commerce, real-estate boards,
boards of trade, or professional football
leagues (whether or not administering a pension fund for football players),
not organized for profit and no part of the net earnings of which inures to the
benefit of any private shareholder or individual.

By the way,
are you curious how the words “professional football leagues” got in there?

The NFL had
been a nonprofit going back into the 1940s. During the 1960s it faced a
challenge from the Al Davis and American Football League. An easy way to defuse
an enemy is to recruit the enemy, and the NFL was talking to the AFL about
merging. There was an issue, however, and that issue was antitrust. There were
two leagues playing professional football, and there was a proposal on the
table to combine them.

This made
the proposed merger political.

It also
meant that one had to go through Senator Russell Long, an extremely powerful
senator from Louisiana.

Pete Rozelle, the then NFL commissioner, had
an idea. What if the NFL “expanded” the league to include a team in Louisiana?
Senator Long was quite interested in that turn of events.

And that is
how we got the New Orleans Saints.

And, around that
time, Congress amended the Code to include the words “professional football leagues.”

Back to our
story.

So the NFL
does not care about benefit (1). The reason is that the NFL does not receive
monies from individuals like you and me. It receives money from its business
members, which are the 32 NFL teams. Each team is a corporation, and payments
by them to the NFL may be deducted a hundred ways, but none of those ways can
be called a “donation.”

Notice that
the “NFL” that is giving up its tax exempt status is NOT the individual teams.
The “NFL” under discussion is the league office, the same office that organizes
the draft, reviews and revises game rules, hires referees, and negotiates labor
agreements with the players union. Each individual team in turn is a separate
corporation and pays tax on its separate profits.

So is the
league office a money-making machine, committing banditry by being tax-exempt?

Here I
believe is the real reason for the NFL’s decision to relinquish its (c)(6): the
NFL is tired of explaining itself. The NFL is an easy target, and the issue brings
bad press when the NFL is trying to create good press, especially after recent issues
with domestic violence and player concussions.

But to give
up the promised land of taxation…?!

Why would
they do that?

What if
there was no profit left once the league paid everything? You have to have a
profit before there can be a tax.

That is, by
the way, (c)(6)’s are supposed to work. They are not a piggybank. They are intended
to promote the interests of their members, whatever that means in context.
Years ago, for example, I worked on the tax filings for the Cincinnati Board of
Realtors, a classic (c)(6). You can readily presume that its interests are to
promote the recognition, status and earning power of realtors in the Cincinnati
real estate market.

The same way the NFL
promotes its teams in a sports universe including Major League Baseball, the
NHL, NBA, NCAA sports, MMA and so on.

How about
the $44 million salary to Commissioner Roger Goodell? Is it outrageous for a
tax-exempt to pay a salary of this amount?

Outrage is a
tricky thing. Someone might be outraged that a tag-a-long politician has become
rich by having her ex-President husband steer – and then drain – donations to a
family foundation while she was serving as secretary of state.

Let’s replace
“outrage” with something less explosive: is it reasonable for the NFL to pay
Goodell $44 million?

Well, let’s consider
an alternative: each team pays Goodell 1/32nd of his salary directly.

The
financial and tax effect is the same, although this structure may be more
acceptable to some people.

So the NFL league
office is going to be taxable.

And I am
looking at the NFL’s Form 990 for its tax year ended March 31, 2013. For that
year, the excess of its revenues over expenses was almost $9 million.

How I wish
that were me. I would be blogging as the Travelling-Around-The-World Tax Guy.

Nine million
dollars would trigger some serious tax, right?

Wait.

I also see on
the Form 990 that the year before there was a loss of more than $77 million.

Ouch. That,
in the lingo of a tax-paying corporation, is a net operating loss (NOL). It can
be carried forward and deducted against profits for the next 20 years.

Let’s assume
that $9 million or so profit for the NFL is a reasonably repetitive number.

Have we eliminated
any tax payable by the NFL for the next eight or more years?

No, it will
not work that way. The NOL incurred while the NFL was tax-exempt will not be
allowed as a deduction when it becomes tax-paying. However, if it happened once,
it can happen again – especially if the tax planners REALLY want it to happen.

Even if it
doesn’t happen, the federal tax would be around $3 million, which is
inconsequential money to billionaire team owners who are trying to maximize
their good press and minimize their bad.

And
remember: tax returns filed by a tax-paying corporation are confidential. There
will be no more public disclosure of Goodell’s salary.

About Me

Thirty years years in tax practice. It's a long time, and I have seen virtually everything short of the fabled tax-exempt unicorn. I was raised in Tampa, went to school in Missouri, taught at Eastern Kentucky University, lived in Georgia, got pulled to Cincinnati when I married, have in-laws in England and a daughter going to the University of Tennessee. I am not sure where I will wind up next, but I hope there is better weather.